Abercrombie & Fitch refashions, shares surge

AndriaCheng

NEW YORK (MarketWatch) — Abercrombie & Fitch Co., the apparel retailer known for its polo shirts, fleece tops and other preppy styles, is refashioning itself to attract new teenage and college-age shoppers, and so far that strategy appears to be working.

On Wednesday, the New Albany, Ohio-based company reported a third-quarter results that were better than expected and raised its outlook for the year, as same-store sales in the United States, its top market, rose 2%. Internationally, excluding the United Kingdom, sales saw some signs of health as the retailer pointed to positive momentum in its new stores in China and Korea and flat comparable sales in Spain.

Reuters

Abercrombie & Fitch’s
ANF, -0.84%
stock, after having slumped 36% this year, surged 34% to $41.92 Wednesday. Rivals Aeropostale Inc.
US:ARO
and American Eagle Outfitters Inc.
AEO, -1.66%
both having outperformed Abercrombie this year, were up 2.2% and down 1.5% respectively.

“We believe the company is taking the right steps to rebuild investor confidence,” said William Blair & Co. analyst Amy Noblin, who upgraded her rating on Abercrombie’s stock to outperform from market perform. Steps to drive consumer demand were “evident in improved flow in the quarter and the recent infusion of more fashion.”

“Following six quarters of declining sequential [same-store sales], trends at Abercrombie & Fitch appear to have stabilized,” she added.

While Chief Executive Michael Jeffries cited a 21% decline in inventory in helping to lift gross margins, as well as a tailwind from lower cotton and other sourcing costs, he said the company is reacting faster to fashion trends and decreasing the percentage of merchandise that features its brands’ logos.

Analysts have questioned whether Abercrombie’s logo-driven fashions still resonate with its target customers, who are increasingly drawn to chains from H&M to Forever 21 that churn out new items at a much faster face. Abercrombie’s top rival, American Eagle, has seen its stock rise 26% this year, because it has been successful rolling out new fashions consistently and decreasing its logo use, according to analysts.

“We’re working to become faster and we’re doing that with conservative plans, shorter lead times and more dollars open to chase” on-trend products, Jeffries said on a conference call. “We’re also working hard to be different by brand. We’re reacting quickly to runway and street [looks], and I think all those things are impacting our fashion assortments. We’re flowing [products into stores] faster and better than we ever have.”

He added that logo products as a percentage of its business is declining and “has been purposely so. … We’re attracting customers who are not interested in logo or would like logo with something else, and that’s been one of our major initiatives.”

To drive critical holiday demand, the apparel retailer plans to increase spending on marketing in the fourth quarter. In the third quarter, it launched an A&F and Hollister loyalty-club programs, and said that more than 750,000 customers have signed up. What’s more, Jeffries said Abercrombie is shutting underperforming stores and slowing the pace of openings.

Despite the improvements, the chief executive pointed out that he’s keeping a conservative view on the fourth quarter, with Hurricane Sandy expected to hurt sales during the period. “With the critical fourth quarter still largely ahead of us and significant macroeconomic uncertainties remaining, we continue to be cautious in our near term outlook,” he said.

Abercrombie’s profit rose to $71.5 million, or 87 cents a share, in the quarter ended Oct. 27, from $50.9 million or 57 cents a share a year earlier.

Sales rose 9% to $1.17 billion, as U.S. sales came in flat at $818.6 million and overseas sales surged 37% to $351.1 million. The company saw sequential comparable-sales improvement in all markets except the United Kingdom, where same-store sales tumbled more than 20%.

Other bright spots in Europe include positive same-store sales in Scandinavia and flat sales also in Belgium. In Asia, its first Hollister store in Hong Kong has seen positive same-store sales, and there’s positive momentum with its first stores in China and Korea.

“We’re optimistic about Asia,” Jeffries commented. We are “more optimistic than we were three months ago.”

Analysts surveyed by FactSet had estimated a profit of 60 cents a share in the third quarter on sales of $1.11 billion, on average. Several benchmarks, including gross margin and same-store sales, also exceeded Wall Street expectations.

“While we are encouraged by the improved trend in [comparable sales] and margins, we remain neutral as we seek clarity in improving fashion and plans for growth from here/curbing cannibalization,” according to UBS analyst Roxanne Meyer.

Third-quarter comparable sales fell 3%, including a 4% drop at its namesake brand and a decline of 1% at Hollister. Analysts had expected an average decline for the company of about 10%.

In the United States, same-store sales rose 2%, reflecting a 6% increase at its chain stores and a 12% decline at flagship and tourist stores. Overseas, they dropped 18%.

Citing the strength of the third quarter’s results, Abercrombie raised its full-year profit outlook to a range of $2.85 to $3 a share, up from $2.50 to $2.75 a share earlier. Comparable sales are projected to decline at a rate in the middle single digits in the fourth quarter, reflecting partly the negative impact of superstorm Sandy.

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